Why did net income drop so sharply in the Transition Period?

Net income fell to $3.3 million from $20.3 million. The filing attributes this mainly to $12.9 million of after-tax One-time Items, including overtime and freight costs from the West Coast bottling relocation and higher advertising expense tied to the fiscal year-end change, along with higher selling, general and administrative expenses and higher grape costs.

What was the UDG Acquisition and how did it affect results?

On September 1, 1995, the company acquired certain assets of United Distillers Glenmore, including several distilled spirits brands and two production facilities, for $141.8 million in cash plus transaction costs. In the Transition Period, the acquired business contributed $53.3 million in net sales, $18.5 million in gross profit, and $3.1 million in after-tax net income, including interest on the acquisition financing.

How is the company financing its operations and debt?

Under its Credit Facility, the company had $236.0 million of term loans and $111.3 million of revolving loans outstanding at February 29, 1996, with $68.7 million of revolving loans available to draw. The company also has $130.0 million of 8.75% Senior Subordinated Notes due 2003. The company stated that cash from operations and revolving loan availability should be adequate for at least the next four fiscal quarters. The filing states that the company has paid no cash dividends since its 1973 initial public offering and that its credit agreement prohibits dividends.

What is the outlook for Fiscal 1997?

Management expects fully diluted net income per share of $2.30 to $2.50 for Fiscal 1997, assuming higher grape costs from the upcoming harvest. It expects gross profit as a percentage of net sales to increase after a second round of price increases on varietal wines, and estimates that higher grape costs will reduce gross profits by approximately $13 million under LIFO.

What litigation does the company face?

Three purported stockholder class actions were filed in the Southern District of New York after the company announced fiscal 1995 results on November 9, 1995. They allege violations of Section 10(b) and Rule 10b-5 and seek unspecified damages, claiming the company's public statements were materially incomplete and misleading. The company filed a motion to dismiss on April 8, 1996, which was awaiting decision, and believes the claims are without merit.

STZ 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-KT filed May 29, 1996. Cited figures are marked; the original filing is the authoritative source.

Canandaigua Wine Company, Inc. filed this Form 10-K transition report covering the six-month transition period from September 1, 1995 to February 29, 1996, after changing its fiscal year end from August 31 to the last day of February.

Net sales for the Transition Period were $535.0 million^a, up 17.7% from $454.5 million in the six months ended February 28, 1995, driven largely by the UDG Acquisition, which contributed $53.3 million in net sales and $3.1 million in after-tax net income. Net income fell to $3.3 million from $20.3 million, reflecting $12.9 million of after-tax One-time Items, higher selling, general and administrative expenses, and higher grape costs. The effective tax rate rose to 50.4% from 38.5%.

The company reported net cash used in operating activities of $84.8 million^b, driven by a $70.2 million inventory increase tied to the 1995 grape harvest, and borrowed $111.3 million under its revolving loans. Total debt stood at $368.4 million at February 29, 1996, including $236.0 million of term loans and $130.0 million of 8.75% Senior Subordinated Notes due 2003.

The company also disclosed a Securities class action, filed after its November 1995 earnings announcement, alleging misleading public statements, which management believes is without merit. For Fiscal 1997, management projected fully diluted net income per share of $2.30 to $2.50^c and estimated that higher grape costs would reduce gross profit by approximately $13 million under LIFO.

02—Key points

Key Highlights

Net sales for the Transition Period were $535.0 million, up 17.7% from $454.5 million in Six Months 1995, with the UDG Acquisition contributing $53.3 million in net sales.
Net income declined to $3.3 million from $20.3 million, mainly due to $12.9 million in after-tax One-time Items, higher SG&A, and higher grape costs.
Gross profit margin fell to 25.9% of net sales from 27.9% in Six Months 1995, with the UDG business generating a 34.7% gross margin.
Net cash used in operating activities was $84.8 million, driven by a $70.2 million inventory increase tied to the 1995 grape harvest.
Total long-term debt was $327.6 million at February 29, 1996, with total debt of $368.4 million including $236.0 million of term loans and $130.0 million of 8.75% Senior Subordinated Notes due 2003.
Management projected Fiscal 1997 fully diluted net income per share of $2.30 to $2.50 and estimated a roughly $13 million LIFO-related gross profit impact from higher grape costs.
Class A stock fell approximately 38% on November 10, 1995 after below-expectation annual results, prompting three securities class actions that the company intends to defend vigorously.

03—Questions

Frequently Asked Questions

Why did net income drop so sharply in the Transition Period?
Net income fell to $3.3 million from $20.3 million. The filing attributes this mainly to $12.9 million of after-tax One-time Items, including overtime and freight costs from the West Coast bottling relocation and higher advertising expense tied to the fiscal year-end change, along with higher selling, general and administrative expenses and higher grape costs.
What was the UDG Acquisition and how did it affect results?
On September 1, 1995, the company acquired certain assets of United Distillers Glenmore, including several distilled spirits brands and two production facilities, for $141.8 million in cash plus transaction costs. In the Transition Period, the acquired business contributed $53.3 million in net sales, $18.5 million in gross profit, and $3.1 million in after-tax net income, including interest on the acquisition financing.
How is the company financing its operations and debt?
Under its Credit Facility, the company had $236.0 million of term loans and $111.3 million of revolving loans outstanding at February 29, 1996, with $68.7 million of revolving loans available to draw. The company also has $130.0 million of 8.75% Senior Subordinated Notes due 2003. The company stated that cash from operations and revolving loan availability should be adequate for at least the next four fiscal quarters. The filing states that the company has paid no cash dividends since its 1973 initial public offering and that its credit agreement prohibits dividends.
What is the outlook for Fiscal 1997?
Management expects fully diluted net income per share of $2.30 to $2.50 for Fiscal 1997, assuming higher grape costs from the upcoming harvest. It expects gross profit as a percentage of net sales to increase after a second round of price increases on varietal wines, and estimates that higher grape costs will reduce gross profits by approximately $13 million under LIFO.
What litigation does the company face?
Three purported stockholder class actions were filed in the Southern District of New York after the company announced fiscal 1995 results on November 9, 1995. They allege violations of Section 10(b) and Rule 10b-5 and seek unspecified damages, claiming the company's public statements were materially incomplete and misleading. The company filed a motion to dismiss on April 8, 1996, which was awaiting decision, and believes the claims are without merit.

04—Continue

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